No specific study has been conducted on the advantages and disadvantages of foreign investment in the MSME sector from the competitiveness and viability point of view by the MSME Ministry, said Minister of State in the MSME Ministry Bhanu Pratap Singh Verma in a written reply to a question in the Lok Sabha. The minister was responding to a question about whether the government is aware of the need for foreign investment in the MSME sector and whether any study conducted on the advantages and disadvantages of foreign investment in the MSME sector from a competitiveness and viability point of view.
Verma said Foreign Direct Investment (FDI) is uniformly applicable irrespective of the scale and size of eligible investee entities.
To promote FDI, the government has put in place an investor-friendly policy, wherein most sector/activities including MSMEs except certain strategically important sectors/activities are open for 100 per cent FDI under the automatic route, subject to sectoral laws, regulations/rules, security conditions and state/local/laws/regulations, he added.
According to the official data, FDI equity inflows dropped by 24 per cent to $20.48 billion in April-September this year 2023 from $26.91 billion during the corresponding period last year. The gross FDI flows had declined 16.3 per cent in FY23 to $71 billion from $81.97 billion in FY22.
A working paper by the Reserve Bank of India (RBI) analysing the impact of foreign direct investment (FDI) on profitability in April this year had noted that FDI plays a greater role in enhancing the profitability of larger companies as compared to smaller companies. The age and size of a company are one of the factors that determine the profitability of FDI-receiving companies, that is, “older and smaller companies are likely to be less profitable.”
This is because in larger companies, the management is often more focused on preserving /improving its reputation, which helps in attracting greater FDI. Hence, larger companies are better placed to take advantage of the increased FDI funding owing to the economies of scale and the cost-effective nature of their operations, it added.